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Together with
Good morning. Rating agencies have mis-rated over $100bn in commercial real estate debt, with at least a dozen deals maintaining top investment-grade ratings despite borrower defaults.
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Today’s issue is sponsored by 1031 Specialists—defer your real estate taxes and maximize real estate gains.
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Market Snapshot
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*Data as of 6/21/2024 market close.
TOP RATINGS
Rating Agencies Criticized for Giving High Scores to Bonds Backing Failing Properties
Source: Dave Simond / The Guardian
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Despite facing foreclosure, bonds tied to single commercial buildings continue to receive top ratings from credit agencies, the Financial Times reports, raising concerns about the accuracy of these assessment reports.
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A troubling trend: Credit agencies have been criticized for mis-rating over $100 billion in CRE debt. This issue is prevalent in single-loan mortgage bonds, which have become popular due to favorable terms for developers and floating interest rates that attract investors. Currently, single-loan deals make up about 40% of the nearly $700 billion in outstanding commercial mortgage bonds.
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Case in point: 1407 Broadway, an office and retail building near Times Square, has dropped 73% in value since 2019, per CRED IQ. Now in foreclosure, the owner, Shorenstein Properties, has not made payments since July, and the $187mn in bonds tied to the building’s debt are still rated AA by Fitch.
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Zoom in: Fitch recently downgraded the 1407 Broadway bond from AAA and put it on watch for further downgrades. AAA ratings suggest extremely low default risk; only Microsoft and Johnson & Johnson in the S&P 500 have such ratings. “You should never have a loss on a AAA-rated bond,” says Ethan Penner, who helped create the first commercial mortgage bond.
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Gowing concerns: Scrutiny of these deals has intensified after investors recently lost 26% of their initial investment in a bond originally rated AAA and backed by 1740 Broadway, the former Manhattan headquarters of MONY. Blackstone bought the building for $605 million in 2014, but it was recently sold in foreclosure for $186 million.
➥ THE TAKEAWAY
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Why it matters: Rod Dubitsky, a former Moody’s analyst, draws parallels to the pre-financial crisis period when agencies misrated subprime mortgage bonds. Experts argue that single-loan commercial mortgage bonds lack diversification and are less reliable. The Federal Reserve has also refused to accept these bonds as collateral for short-term loans. Critics urge rating agencies to improve their processes to prevent a repeat of past financial crises.
TOGETHER WITH 1031 SPECIALISTS
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Lost in the math of capital gains from the sale of your investment property?
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1031 Specialists’ handy calculator gives you a complete breakdown of all the numbers, from capital gains calculations to adjusted basis to potential tax exposure. Download it here (no email required).
✍️ Editor’s Picks
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Real assets: More retirees prefer investing in real estate over traditional 401(k)s because real estate offers the security of tangible assets, steady rental income, and tax breaks.
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State of the economy: Moody’s Economist Nick Villaunpacks the implications of two positive inflation reports and a stable Federal Reserve meeting for the broader economy.
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Getting creative: As the era of cheap money fades, the world’s largest real estate investor must navigate uncharted waters in pursuit of stellar returns.
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CRE investing: Jones Lang LaSalle CEO Christian Ulbrich reports an uptick in commercial real estate investments, identifying data centers as the hottest asset class.
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Premium: Two major developers report that mass timber buildings are leasing faster and commanding higher rents than those built with standard materials.
🏘️ MULTIFAMILY
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Unstabilized: BlackRock sold its 85 East End Avenue apartment building for $75 million to Farallon Capital, nearly two decades after tenants blocked a previous sale attempt.
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Hot market: Silicon Valley has surged to become the sixth most competitive rental market in the U.S., driven by a resurgence in the tech sector and significant investments in AI.
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Rent trends: While most U.S. metro areas have seen significant rent hikes, San Francisco is the only major city where one-bedroom apartment rents have dropped since 2019.
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Affordable buy: SRM Development purchased the 358-unit Mill at First Hill in Seattle for $84 million, using an Amazon housing fund to make it permanently affordable at $234,637 per unit.
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Motivation: Nearly half of younger renters plan to move by fall, and their most desired amenity is an in-unit washer and dryer.
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Lower rates: Rent growth offers relief to landlords but may delay the Federal Reserve’s interest rate cuts amid Sun Belt supply gluts.
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Moving ahead: Onni Group’s $1bn development near Bally’s planned casino in River West is advancing, with approval for nearly 2,500 apartments, retail, green space, and an amphitheater.
🏭 Industrial
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IOS interest: Fortress Investment Group secured $708M in refinancing for industrial outdoor storage, led by Deutsche Bank, with a $493M CMBS loan and a $215M balance sheet loan.
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TREX lease: Virginia-based TREX has leased a 324,000-square-foot warehouse at Mid-Atlantic 81 Logistics Park in Berkeley County, West Virginia, with Equus Capital Partners as the landlord.
🏬 RETAIL
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Default: The $211.3M CMBS loan for Ovation Hollywood in LA has moved to special servicing due to imminent default after facing occupancy and cash flow issues ahead of its maturity date.
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Brookfield exit: Six years after acquiring The Yards in D.C.’s Navy Yard, Brookfield Properties plans to sell three retail and mixed-use properties totaling nearly 92K SF.
🏢 OFFICE
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Auction loss: A 145K SF office building in Rockville, Maryland, sold for $5.7M, ending a three-year decline after losing its sole tenant and resulting in $33.7M in losses for investors.
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Shifting focus: JBG Smith is converting older National Landing buildings to apartments, hotels, and retail, while focusing on an office building with 43% vacancy to attract tenants.
PRODUCT REVIEWS & GUIDES
📈 CHART OF THE DAY
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The June release of the Green Street CPPI report showed the first positive pricing movement in commercial real estate since May ’22, roughly 24 months.
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